Sunday, January 29, 2017

Death by China?

“We will follow two simple rules
– buy American, hire American”, said a defiant Donald Trump to a cheering
public & an uncomfortable Washington Establishment, as he was sworn in as
the 54th President of the United States of America earlier this month. In his election victory, Trump smashed most expert forecasts, election pundits, opinion polls
and the mainstream media narrative that had consistently projected his opponent as the
favorite to win.

For those surprised by Trump’s
victory, go no further than videos such as this, which might have played a
major role in influencing public opinion during the U.S. Presidential
elections. Claiming to be one of the most watched documentaries on Netflix for
3 years, the film narrates the story of an “increasingly destructive trade
relationship” with China, which has led to the closure of over 50,000 American
factories since China entered the WTO in 2001. The film blames China for
causing loss of millions of jobs and accumulation of over $ 3 Trillion of U.S.
debt to the “world’s largest totalitarian nation”. You can watch the full video here:

Loaded with terms such as “illegally
subsidized exports” or “stealing jobs”, the import of the film is clear: Over the past decade and more, America has lost its ‘trade battle’ with China, and this loss is the result of an
‘unfair’ advantage the Chinese businesses get vis-à-vis their American
counterparts. The film makes five basic allegations to corroborate its claims:

1. Polluting
for Profits: Stringent environmental norms on U.S. manufacturing levy a heavy financial burden on U.S. businesses, but their Chinese competitors follow no such norms, giving them a cost
advantage.

2. Worker
Abuse: China exploits its workers, forcing them to work for long hours often in
inhuman conditions. This raises productivity per worker.3. Currency
manipulation: China pegs the value of the Yuan to the Dollar much below what it
should be, which benefits its exporters.

4. Counterfeiting
& Piracy: The Chinese are cheating on Patents, Trademarks and other such
intellectual property.

Due to all this, says the film, "they are
cheating monumentally” by producing - sometimes even at 1/10th the
price of what it costs to produce in the United States. This has led to the
death of American manufacturing. Almost 90% of all products sold at Wal-Mart
are made in China. From garments to chopsticks, Christmas decorations to
computers, and from printers to shoes – often it is almost impossible to find
anything in an American store that is NOT made in China.

Really?

The “unfair” Chinese
advantage is easy to "see" - and hence to blame, but things become complicated as the film
moves on to discuss the role of American Multinational Corporations, who have themselves
been at the forefront of outsourcing their manufacturing. From Apple
to Caterpillar and IBM to GE and Cisco to Ford, every large American corporate
worth its name has shifted it’s manufacturing to China to cut costs and improve
profitability. Is it right for a Corporate Entity to cut domestic jobs to
maximize profits? The film admits “profits Vs.jobs is at the root of America’s
offshoring problem”. Sure corporate CEOs are focused on shareholder value, but isn’t
this exactly the way it should be?

From time to time, I have seen the
“blame China” narrative make its way into public sentiment. But most such
narratives tell only one side of the story. Ask someone who bought his first
big screen TV or furniture 50% cheaper, cheap imports have given their
buyers a standard of living that was not possible earlier. When a foreign
government pays you to buy toys or coffee making machines, is there really a cause to complain?
As corporate America offshored jobs, profits got a boost, and despite the Wall Street engineered financial crisis of 2008, stock
markets today are at an all time high, boosting the 401(k)s and mutual funds of ordinary Americans.

The documentary also erroneously
links the $ 3 T U.S. government debt that the Chinese hold with cheap imports.
Contrary to what is shown (and even otherwise believed); the large government
debt actually represents a huge advantage the United States enjoys over other
nations on account of the U.S. Dollar being the currency of international
trade. Most exports worldwide are invoiced in U.S. Dollars, and the exporting
country has no alternative but to park them in U.S. Government debt. The money
thus represents a virtually free source of financing for the U.S. government. And
as Jack Ma, founder of Alibaba pointed out recently, what the U.S. did with this money may tell
the true story of why the jobs went where they went.

What about human rights? The film also mentions several human rights violations by China, such as the repression
of the Falun Gong or Tibet, or its role in human organ trade or nuclear
proliferation and aggressive military build-up. These are non-economic
arguments that should not be used to color our judgment over cheap imports.

It
is also a contradiction to state that China’s lack of concern for the environment gives them an
“unfair advantage”. Indeed, the documentary itself shows China paying the
price for its monumental environmental neglect. It is well known that Chinese cities are now considered to be
among the most polluted in the world.

Where are the solutions?

The ‘blame China’ rhetoric is a
fallacy, and it best stands exposed when its time to offer solutions. While the documentary ends recommending “trade reform with China” and says that China should be held “accountable
for human rights abuses”, it fails to come up with specifics. While
pitching for ‘a strong manufacturing base for a prosperous future’, the film
fails to tell you exactly how it can be achieved.

And this is no surprise.

For, China is just the symptom, the
cause lies elsewhere. And this is pointed out in the film itself by Ralph
Gomory, President Emeritus, Alfred P. Sloan foundation, when he says, “we are
living beyond our means, we have artificially high standards of living”. Fix
that, and everything will fall in place.

And that’s what President Donald Trump will
need to do, to “Make America Great Again”.